The
lease document binds the landlord (the lessor) and the tenant (the lessee)
to a long term relationship, each dependant on the other to some degree
for economic gain and in certain circumstances for economic survival. The
covenantor, (the guarantor, the indemnifier), if any, has a substantial
stake in this relationship.

The
lease is similar to a collective agreement in that both documents set out
the rules of conduct, obligations, duties, benefits, and burdens of each
party. When analyzing a lease (or offer to lease, sometimes called an agreement
to lease) there is a plethora of possible scenarios which could occur over
the life of the lease agreement, including its renewal.

Together
with these obligations, one must also consider the financial investment
each party incurs in this venture, together with the expectation of economic
success.

All
too often we, as lawyers, are faced with a client who requires us to review
a "standard" 46 page lease and possibly a 12 page offer to lease they are
about to sign the next day. The document is usually received by way of
fax or is photocopied such that its quality is unreadable.

In
addition, we receive the standard request to "give it a quick review of
any major problems, but don't spend too much time as I want to keep the
bill down to $500.00 or $600.00". The lease is usually delivered at about
3:45 p.m. the day before signing, with the additional
requirement that the leasing agent needs it to be signed before 10:00 a.m.
the next day.

I
have long since refused to take those instructions from a client in order
to keep my errors and omissions insurance down to its proper level. I don't
propose to entertain accusations from the same client, 6 months or a year
down the road, "why didn't you tell me about this clause - I counted on
you".

In
the business community today, very seldom can a lawyer "review a standard
46 page lease" adequately within the span of a couple of hours, let alone
fully advise their client. The most knowledgeable lawyer in commercial
leasing requires substantial time to review the lease, as well as meet
with the client in order to ascertain whether or not the terms of the lease
are not only fully understandable to the client, but also meet the requirements
now and for years to come.

All
too often, the tenant informs you that "he or she has a good rate at only
$18.00 per square foot". As you scan the lease for the quadruple net costs;
net taxes; net insurance; net maintenance; and new net everything else,
your attention is generally drawn to those "new terms" such as:

The payment of depreciation on fixed assets;

The 15% administration fee based upon the basic and additional rent;

The 16% gross up between rentable and usable (remember, the building is
measured by BOMA standards);

The lack of waiver of right of subrogation in favour of your client;

The one-sided indemnity clause;

The assignment of your client's authority to the landlord regarding the
estoppel certificate if he fails to sign the agreement within 3 clear working
days;

The new "shotgun clause" allowing the landlord to terminate the lease if
the tenant wishes to assign or sublet the lease for the remainder of the
term; and

Other such covenants of a "trivial nature".

The
converse occurs when your client, the landlord, leases his premises and
instructs you that all he wants you to do is to "prepare a short lease,
like those printed on the stationary store forms, but please protect him".
At this point, I usually hand the client the most applicable 40 page (double
spaced, including indexed) hard copy "standard lease" that I may have on
my computer, requesting the client to review the document and delete those
matters that do not concern him.

By
this time, red flags should be appearing everywhere. It is imperative that
you explain to your client the process involved in reviewing, preparing,
and negotiating a lease. Contemporaneous with this education procedure,
it is necessary to set out, preferably in writing, the instructions you
have from your client.

All
too often, as a lawyer we fail to define who is the client and the purpose
of being retained by that client. Is the client:

an existing company, or

a company yet to be formed, or

an individual, or

a partnership, or

some other entity, or

a combination of the above, or

other.

In addition,
are we being retained to:

review an offer to lease, or

review a lease document, or

to advise, either orally or in writing, on the existing document, or/and

take an active part in the negotiations.

Once
the lawyer has established the ground rules with the client, the lawyer
should set about discussing with the client the nature of the business,
the short and long term objectives of the client, and any other relevant
information so that the lawyer may review the lease document within the
proper set of circumstances.

"A VERBAL CONTRACT ISN'T WORTH THE PAPER ITS WRITTEN ON"

Samuel Goldwynn

Leases,
like other agreements, should be reduced to writing. The document should
contain all of the
terms relied upon by each party. In addition, leases, like all good agreements,
require execution. It simply benefits no one to rely upon an unsigned agreement.

It
is not sufficient to rely upon an agreement to agree. For an agreement
to agree is no agreement at all. Neither should you rely upon a "gentleman's
agreement".

A gentleman's agreement is an agreement which is not an agreement
entered into between two persons, neither of who is a gentleman, with each
expecting the other to be strictly bound, while he himself has no intention
of being bound at all.

Mr. Justice Vaisey

There is no such thing as standard
commercial lease agreement. Standardization only occurs where, for
example, a shopping centre ensures that the bulk of the clauses contained
in its lease are consistent among all of its commercial retail units (not
its anchor tenants).

I
shall attempt, in the rest of this paper, to explain some of the fundamental
areas of a lease. I do not propose to go into any detail. Such details
should be reviewed with your lawyer at the appropriate occasion.

A PRACTICAL
GUIDE TO REVIEWING A COMMERCIAL LEASE

Landlord

Who
is a landlord? Do they really own the property or are they a lessee under
a ground lease, a partnership or limited partnership, or a shell company?
If you are relying upon the landlord's covenant, then the landlord should
be an entity of substance - what is the quality of the covenants?

Do
a land title search to ensure that the landlord does, in fact, have the
right to lease.

Tenant

Who
is the tenant? Is it a partnership? If so, then the landlord should ensure
that all of the partners sign personally. Is the tenant a company? If so,
then ensure that the document is signed by the company. Is there a guarantor?
If so, then ensure the guarantor signs the lease and that the terms of
the lease are sufficient to bind the guarantor. Again, what is the quality
of the covenants?

Guarantor

Do
you have an indemnification or a guarantee? What is the nature of the indemnification?
Is it for the whole term of the lease or a portion of the lease? Is it
for an unlimited amount of money or is the indemnification capped? What
happens when the tenant goes into bankruptcy? Does the indemnifier have
to sign a lease for the remaining term?

Date of the Agreement

What
is the date of the agreement? When does the lease take effect?

Is it a Lease or a License?

There
are a number of interests in land that are analogous to a lease and share
many features of a lease, but do not create a lease. A lease creates an
interest in land. It is an interest less than fee simple. A license is
a grant of a right to something which otherwise would not be lawful. For
example, the right of a vendor to sell hot dogs at a football game - such
license is not exclusive. Hotels, boarding houses and parking lots are
some of the examples of interests that are licenses and not leases.

Premises

At
the outset, the parties should have a clear understanding of the description
of the demised premises and the appurtenances thereto, (ie. parking). If
the lease is for an entire building, then it is easier to ascertain the
demised premises. If the lease deals with a portion of the building, then
the lease should contain the plan of the demised premises which should
be attached to the lease. If it is surveyed, so much the better. If the
tenant has the right to use common area, then the common area should also
be set out clearly in the lease so that there is no misunderstanding.

The
dimensions of the demised premises may have an impact upon the economics
of the lease. The parties must determine who has the burden to pay for
taxes, utilities, repairs and maintenance, insurance and general operating
expenses. In a shopping centre anchor tenants may not pay the same amount
of operating expenses as a commercial retail unit (CRU).

In
addition, the parties should know, for certain, the exact size of the demised
premises and whether it is measured by BOMA standards. No tenant likes
to think that they have 1,200 square feet and find out later that, in fact,
the premises have been remeasured and they are now paying for 1,400 square
feet or more.

Provisions
of the lease should relate to the condition of the demised premises and
the obligation to maintain and repair the same. Are the premises being
rented on a "as is" basis? What is the cost for renovation, including tenant
improvements? Will the tenant be able to get the required licenses from
the municipality in order to effect the fixturing which is necessary.

Term

The
term of the lease should be clearly set out. Generally, the term is a period
during which the tenant has exclusive right to possession of the premises
and the corresponding obligation to pay rent. It is of a primary concern
to all parties that the provisions governing the commencement and termination
of the term are clear and unambiguous.

The term of the lease or the remaining portion thereof is a critical factor
to the tenant where the tenant wishes to sell their business to a third
party.

Commencement Date

In
many leases, the commencement date of the term of the lease coincides with
the date of the lease agreement, and consequently, there is no room for
ambiguity. However, in many commercial leases, the commencement date of
the term depends upon the occurrence of another event, usually related
to the completion of improvements which the landlord has agreed to build.
In addition, the commencement date may be tied to a period in which there
is free "basic rent".

Rent

Usually
rent is divided into two sections (possibly three - percentage rent). The
first section is basic rent. It usually refers to the amount of rent per
square foot on an annual basis, payable monthly over the term of the lease.

For
example, if you are paying on 1,000 square feet (rentable - not usable),
at a basic rent of $10.00 per square foot, your basic rent payable on a
monthly basis would be $833.33 (1,000 X $10.00 = $10,000.00 divided by
12 = $833.33).

In
addition to basic rent, you will, as a tenant, pay additional rent. This
can vary greatly from lease to lease. Generally, it is referred to a triple
net, which means you pay everything else that the landlord would pay, save
and except his income tax and mortgage payments (and sometimes that). This
amount may include:

All taxes, including corporation capital tax;

All insurance the Landlord decides to put on the property;

All operating costs, charges and expenses;

An administration fee. For example, 15%;

A sinking fund so that they can, on an annual basis, collect enough money
to replace the HVAC, elevators, furnace, roof and other structural matters.

Payment of Rent

The
payment of rent is generally on a monthly basis, payable in advance on
the first day of each month (as opposed to a mortgage payment which is
a payment after the use of the money for a period of one month).

Sometimes
the landlord will require a series of post-dated cheques from the tenant.

It
is not unusual for the lease to contain a waiver by the tenant against
any off-set, abatement, or deductions. This means that the tenant waives
and renounces any and all existing and future claims or off-sets or compensation
against the rent and will pay the rent (basic and additional) regardless
of any claim the tenant may have against the landlord.

Occupancy and Permitted
Use

Leases
generally contain a term indicating the use of the premises. If the use
is narrowly defined, ie. dental offices only, then the tenant cannot use
the premises for any other purpose. The landlord's consent can in certain
circumstances be unreasonably withheld. This becomes a problem if the tenant
wishes to sublease or assign the premises to a third party who wishes to
use the premises for something other than a dental office).

It
is also important to define the use of the premises, as it will reflect
on what the appropriate rent should be, should the tenant exercise an option
to renew.

Tenant Covenants

Pay Rent

Already explained

Waste and Nuisance

The landlord wishes to ensure that the building is not subject to waste
or injury to the building and accordingly, the tenant will have to covenant
not to cause waste or any form of nuisance.

Insurance Risks

The landlord does not wish to incur additional insurance costs and
therefore the tenant will be bound to act in a manner such that he will
not increase the costs of insurance.

Cleanliness

Self-explanatory.

Compliance with Laws

The landlord wishes to ensure that the tenant does not breach any of
the municipal, provincial or federal laws, including fire, safety laws,
bylaws and regulations. These laws may also include environmental laws
under the
Waste Management Act of British Columbia, as well as the
general environmental laws, (amalgam waste?).

Installations

The landlord wishes to ensure that there is no installation of equipment
or alterations to the premises which would breach any law or cause interference
with the enjoyment of the building by other tenants.

Rules and Regulations

The landlord will generally set out a set of rules and regulations
which they may change from time to time.

Overholding

Where the tenants stays in the leased premises after the expiration
of the lease without any further written agreement, without objection by
the landlord, the rent usually equates to 150% of the monthly annual base
rent.

Signs

The landlord will ensure that the signs meet with the building requirements.

Inspection and Access

This section allows the landlord, at any time and from time to time,
to enter the premises with its authorized agents, employees and contractors,
for various purposes including but not limited to window cleaning, maintenance,
janitorial service, repairs or alterations or improvements to the demised
premises.

Showing Leased Premises

This permits the landlord or its agents or employees to show the leased
premises to prospective tenants during normal business hours, during the
last few months of the term of the lease.Landlord's Covenants

Quiet Enjoyment

This is generally the major covenant given by a landlord to a tenant,
allowing the tenant to enjoy the premises without disturbance, or interruption
of possession from the landlord. It doesn't mean, "no noise".

Interior Climate Control and
Lighting

Self-explanatory.

Elevators

If you are not on the main floor, then you wish to ensure that the
elevators are operational at all times, or, if the elevator breaks down,
that the landlord will promptly have the elevator repaired or replaced
so as to facilitate access for your patients.

Entrances, Lobbies and Other
Common Areas

As a tenant you wish to ensure that your customers and patients have
access to your demised premises during normal business hours.

Washrooms

Self-explanatory.

Janitorial Service

Self-explanatory.

Repair, Damage and Destruction

(a) Landlord's RepairsEnsure that the Landlord has the duty to keep the premises in a good
and reasonable state of repair, consistent with the general standards of
a building of a similar nature, age and character and that the landlord
will repair defects promptly.

The lease should be very specific, from a tenant's point of view, to
indicate that the tenant is not liable for any structural repairs or replacement.
You may also wish to define what is meant by structural repairs, including
replacement of roof.

(b) Tenant's RepairsThe landlord wishes to ensure that the tenant keeps the demised premises
in a like, good and reasonable state of repair.

Abatement and Termination

Where there is substantial damage to the premises, such that the tenant
can no longer enjoy full use of the demised premises or a substantial portion
of the demised premises, you, as a tenant, wish to ensure that the rent
will abate for a period of time with the requirement that the landlord
make up its mind as quickly as possible whether or not they will repair
or terminate the lease pursuant to the termination provisions contained
in the lease.

Taxes

The tenant will not only have to pay its taxes for its business, but
also the real property taxes (and probably the landlord's taxes pursuant
to the Corporation Capital Tax Act).

As a tenant you should ensure that you obtain prompt notice of any increase
in the tax assessment, with the right, at your cost, to oppose any such
increase.

Assignment
and Subletting

Assignment
and subletting are different. A sublet is a situation where the tenant
allows a third party (a subtenant) exclusive use of the premises for a
portion of the remaining term of the lease. An assignment contemplates
the assignment of the whole of the remaining term of the lease.

Generally
speaking, any such assignment will require the written consent of the landlord.
The landlord may have the right to unreasonably withhold such consent or
may have to act reasonably, depending upon the wording of the lease. This
term is very important when you want to sell your practice.

In
most situations where the tenant assigns or sublets, they will still be
liable to the landlord should the assignee fail to live up to the covenants
of the lease. This remains a contingent liability to the tenant and should
be addressed in the lease, including whether or not the tenant is liable
to the landlord on an assignment during a renewal term.

In
some cases, where the tenant wishes to assign, the landlord has the right
to terminate the lease. Generally, the landlord wishes this right where
the value of the premises has increased during the terms of the lease.

In
most instances, the landlord will want to have the financial and other
background of the prospective new tenant or subtenant and will
charge the tenant for such review prior to giving its consent.

Change in Control of Tenant

If
the tenant is a corporation, then the tenant could avoid the assignment
or subletting clause by simply transferring the shares in the company to
the new third party. In order to avoid this avenue of escape, the landlord
usually has a clause in the lease which says that if there is a change
in control of the tenant company, then that is deemed to be an assignment.

Liens and Encumbrances on
Fixtures and Improvements

The
landlord prefers to not have its property encumbered by builder's liens
or Personal Property Security Act charges. The landlord likes to
have a clear title, subject only to any mortgage it has granted to a financial
institution.

As
a tenant, if you wish to give security to your financial institution, then
it must dovetail to the terms of the lease.

Removal of Fixtures and
Improvements

All
leasehold improvements upon the premises generally become the landlord's
property at the end of the lease, without compensation. It is important
to distinguish between improvements, fixtures and chattels. In certain
instances, the landlord may require the tenant to remove certain improvements,
fixtures and chattels at the tenant's expense (ie. a bank vault).

Relocation of Premises

It
is not unusual to see a clause in the lease allowing the landlord to move
the tenant to a different floor in the building, particularly without compensation.

Insurance and Liability

1. Landlord's Insurance

The
landlord will insure the building as a prudent owner. The cost of the insurance
will be borne by the tenant or if the tenant leases a portion of the building,
then the tenant will pay its proportionate share of the insurance.

In addition,
the landlord's lease generally contains a clause allowing the landlord's
insurance company the right of subrogation. What does this mean? It means
that in spite of the fact that the tenant may have caused "a fire" (or
some other sort of hazard) where insurance proceeds have to be paid by
the insurers to the insured (the landlord), the landlord's insurers can
still sue the tenant. It is not uncommon for the tenant to ensure that
the lease contains a waiver of that right of subrogation.

2. Tenant's Insurance

The
tenant should take out all of the appropriate insurance as a prudent tenant,
including commercial general liability of an amount not less than "x" million
per occurrence, loss of income insurance and any other insurance that a
tenant's reputable insurance agent deems prudent.

Insurance
should also be kept to a level which does not trigger co-insurance. Co-insurance
occurs where some insureds may decide to insure for an amount that is less
than the full value of the property.

In
order to deter insureds from under insuring, insurers stipulate that minimum
percentage of the overall value must be insured, usually in the amount
of 80% or 90%. The value is not determined when the policy is issued, but
at the time of the loss.

3. Severability of
Interest and Cross Liability Clause

As
a general rule, if there are two insureds (for example a landlord and a
tenant) named in a policy, one insured cannot recover under the policy
for any damage to its property caused by the other insured and a default
by one named insured will generally void the policy as against both insureds.
In order to avoid these problems, the insureds should require that a severability
of interest and cross liability clause be added to the policy. This clause
enables the insured to receive the benefits contained in the policy, notwithstanding
the fact that the damage was caused by the other insureds policy. Further,
a default by one named insured under the policy which would otherwise void
the policy in its entirety, applies only to the party making the default
and does not affect the coverage of the other named insured.

Subordination, Attornment,
Registration and Certificates

1. Mortgage

The
rights of the landlord under the lease may be mortgaged or assigned to
a purchaser or purchasers as the case may be. The landlord generally requires
the tenant to attorn to and become a tenant of such purchasers or mortgagees
under the term of the lease and therefore is required to sign certain documents.

2. Subordination and
Attornment

The
subordination clause requires the tenant to subordinate their interest
to that of the mortgagee. If this is required, then the tenant should obtain
a non-disturbance agreement signed by the landlord and the mortgagee basically
stating that if the landlord is in default under its covenants in the mortgage,
and the mortgagee intends to take action against the landlord, then it
will give notice to the tenant and provided that the tenant has complied
with all of its requirements under the lease, not to disturb or affect
the tenancy - basically leaving the tenant alone.

3. Registration

It
is generally prudent, particularly where the lease is 3 years or more,
to register the lease in the Land Title Office. However, most landlords
do not want these lease to be registered for obvious reasons. Sometimes
a compromise can be worked out.

4. Certificates

From
time to time, the landlord may require the tenant to give an estoppel certificate
to a subsequent purchaser of the building or to the mortgagee, indicating
that there are no defaults by the landlord. If in fact you sign an estoppel
certificate saying that the landlord is not in default under the lease,
knowing that the landlord is in default under the lease, then you may be
precluded from prosecuting your right under the lease for that default.

Tenant's Defaults - Remedies
of Landlord

You
should review carefully the remedies provided to the landlord on the non-payment
of rent, payment of interest, and time to remedy a default.

The Whole Lease

As
I said earlier in this paper, a verbal agreement is not worth the paper
it is written on. Consequently, any side deals, arrangements or representations
made between the parties should be reduced to writing. Generally, the lease
says that there are no covenants, representations or warranties, express
or implied, save and except that which is set out in the lease.

Demolition

Depending
upon the age of the building, it is not unusual to have a demolition clause
in the lease. Accordingly, if the demolition clause kicks in under a specific
time (ie. 1 year), then it would be prudent not to put a lot of money into
tenant fixtures and tenant improvements. In effect, notwithstanding the
term of the lease, the landlord has the right, upon giving you appropriate
notice, to terminate the lease on the basis that the building will be demolished. A
demolition clause will affect the value of your practice.

Expropriation

The
expropriation clause should be so designed as to allow both the landlord
and the tenant to effectively press their claims forward so that both will
benefit from any expropriation.

Option to Renew

This
is one of the most neglected clauses contained in a lease. If you wish
to exercise an option to renew, please understand that it must be done
within the time limits specified in the lease, preferably acknowledged
by the landlord, and if the rent cannot be agreed to, then you are still
bound by leasing the premises during the option period with the issue of
the amount of rent to be determined generally by arbitration.

You
cannot, as some client believe, simply walk away from the lease once you
have exercised your option to renew, simply because you did not agree on
the appropriate rent.

For
a further discussion on options to renew and arbitration, please visit
my website at http://glasnerqc.tripod.com
where there is a lengthy paper on options to renew.

Parking

For
many tenants, parking is an important issue. For example, if you are in
a strip shopping mall where parking is limited, you may wish to have certain
stalls marked exclusive for your use. You may also wish to consider the
need for parking stalls of the other tenants in the strip shopping mall
or building. For example, you may not want to be next door to a real estate
office where over 20 agents come and go from the premises on a daily basis.

Personal
Covenants

If
the lease contains a Right of First Refusal or an Option to Purchase then
make sure the document is registered in the Land Title Office. Also ensure
that these personal covenants (which do not run with the land) carry over
during a renewal period.

CONCLUSION

This
paper hopefully will serve as a practical guide to reviewing a commercial
lease. It is not a substitute or an alternative to seeking professional
advice (on a timely basis) from your lawyer, accountant, appraiser, or
another professional.

Respectfully submitted,
Kenneth J. Glasner, Q.C.

AUTHOR'S NOTE

Throughout this paper, I have, where otherwise appropriate,
used pronouns in the masculine gender only. I did this solely to avoid
the cumbersome and awkward technique of referring to both genders concurrently,
such as "he/she", "he or she", "his/her" or "his and her". It was therefore
merely an attempt on my part to improve readability. No sexist connotations
should be inferred or implied from this purely stylistic decision. As a
result, wherever the masculine gender is used in this book, readers are
encouraged to read in a reference to the feminine gender, or to both.,

IMPORTANT

The course material deals with complex matters and may
not apply to particular facts and circumstances. As well, the course material
and the references contained therein reflect laws and practices which are
subject to change. For these reasons, the course material should not be
relied upon as a substitute for specialized professional advice in connection
with any particular matter.

Although the course material has been carefully prepared,
neither the Vancouver and District Dental Society, nor Kenneth J. Glasner,
Q.C., nor any of the persons involved in the preparation of the material,
accepts any legal responsibility for its contents or for any consequences
arising from its use.